FirstEnergy’s plan to sell a 30% stake in a transmission subsidiary for $3.5 billion highlights the “attractive value” of federally regulated transmission businesses, Morgan Stanley analysts said in a note Friday.
FirstEnergy on Feb. 2 said it has agreed to sell a share of FirstEnergy Transmission, called FET, to Brookfield Super-Core Infrastructure Partners, which already has a 19.9% stake in the subsidiary through a deal that closed in May.
FET is the holding company for three of FirstEnergy's transmission subsidiaries regulated by the Federal Energy Regulatory Commission: American Transmission Systems, Mid-Atlantic Interstate Transmission and Trans-Allegheny Interstate Line Co. They make up one of the largest transmission systems in the PJM Interconnection.
FirstEnergy, based in Akron, Ohio, said it plans to use the proceeds to reduce debt and increase spending on its system. It expects to close the transaction in early 2024. The deal must be approved by FERC and utility regulators in Pennsylvania and Virginia.
FirstEnergy increased its 2021-2025 long-term capital spending plan to nearly $18 billion, up from about $17 billion. It cut its debt by $2.5 billion last year, or by more than 30% compared to year-end 2021. The company aims to have a funds-from-operations to debt ratio of 14% to 15%.
The planned deal implies a roughly 27 price-to-earnings multiple based on FirstEnergy’s 2025 estimated earnings per share, according to the Morgan Stanley analysts.
“The valuation multiple realized in this transaction once again shows the attractive value of FERC-regulated transmission businesses and in our view argues for higher premia for companies with large transmission exposure,” the analysts said.
Utility companies with large FERC-regulated transmission ratebases include Ameren, American Electric Power, Edison International, Exelon, Eversource, Pacific Gas & Electric, Pinnacle West Capital, PPL and Sempra, according to Morgan Stanley.
The valuation of the transmission assets also “enhances strategic flexibility for these companies to consider options to optimize balance sheet and asset mix,” the analysts said.